Grandchildren Run South Korea’s Economy

Jan. 18 (Bloomberg) -- South Korea’s tycoons were relieved
when the pro-business Park Geun Hye was elected last month as
the nation’s 11th president.

The main criticism against her predecessor and party mate,
Lee Myung Bak, was that he was as beholden to corporations as
leaders get. Park’s win was seen as a victory for the economic
system that raised Korea from devastation in the 1950s. Yet 60
years on, it’s time to highlight the absurdity of this view.
Returning to the past is no way to secure the future for Asia’s
fourth-biggest economy.

There’s much to admire about where South Korea is as 2013
begins. The 2.8 percent growth forecast for this year isn’t
scorching, but is quite respectable among nations in the
Organization for Economic Cooperation and Development. South
Korea is a role model for middle-income nations and annual per-capita income is already more than $30,000, placing it among the
world’s 30 most-prosperous nations.

Yet that success comes at great cost: a widening income
gap, struggling small businesses and the highest suicide rate in
the developed world. At the root of this paradox is the very
engine that powered the nation. Its celebrated family-run
conglomerates, the “chaebol,” have become for South Korea what
too-big-to-fail banks are to the U.S.

Samsung Nation

As love-hate relationships go, few rival the one that South
Koreans have with their corporate overlords. No company
personifies the success and peril of Korea better than the one
Lee Byung Chull founded in 1938. What started as a small
grocery-trading firm is now the pride of 50 million Koreans.
Today, the gadgets that Samsung Group’s electronics division
sells in soaring numbers exemplify the can-do spirit that has
Apple Inc. and Japan’s entire economy looking over their
shoulders.

Some go so far as to refer to their country as the Republic
of Samsung. It’s possible, after all, to live a Samsung-only
life. You can work at Samsung, live in one of its apartment
buildings in Seoul’s glitzy Gangnam district, pay for your
Galaxy phone with a Samsung credit card, invest in your future
with its financial-services units, get your health checked at
one of its medical centers, blow off steam watching Samsung-owned sports teams, use its travel agencies and even buy a latte
at a Starbucks outlet owned by the retailer that is run by the
nephew of Samsung Chairman Lee Kun Hee.

When South Koreans gush about the “Miracle on the Han
River,” the pivotal role of top corporate names such as
Samsung, Daewoo, Hyundai, LG or Lotte is sure to come up. If
only there were more recognition given to how these giants also
left the nation’s economy dangerously top-heavy.

Every economy has a certain amount of innovative oxygen to
sustain its dynamism and prosperity. Too much of South Korea’s
is absorbed by the chaebol. Their dominance not only starves
young would-be entrepreneurs of air, but also impedes the
creation of a vibrant stable of small and mid-size companies.

In 2010, exports by the chaebol accounted for 84 percent of
overseas shipments. Today, South Korea’s 10 biggest
conglomerates make up more than half the total value of the
1,757 companies on the Korea Stock Exchange. Ever wonder why
South Korea can be so prone to cyclical shocks? When the
goliaths falter, South Korea does, too. It’s not that different
from the U.S. relationship with its financial industry; when
Wall Street lays an egg, the rest of the country suffers.

Make or Break

These next five years are make-or-break ones for South
Korea. China is trying to be a technology leader and has
surpassed the U.S. to become the largest filer of patents. Just
as China is honing its skills, Japan’s new prime minister,
Shinzo Abe, is unleashing a $116 billion stimulus package and a
variety of tax incentives to encourage investments in
technology. South Korea must find a new path to compete in Asia.
Complacency is no longer an option.

Yet the odds don’t seem great that Park will be the
visionary who will embrace a new economic model. It was her
father, former dictator Park Chung Hee, who built up the chaebol
in the 1960s and ’70s with easy credit, subsidies, tax breaks
and protection from foreign markets. Nor is her New Frontier
Party famed for its independence from the country’s political-donor class.

Park pledged to move away from a system dominated by “big
business groups,” but executives hardly seem cowed. To get
their attention, she should break up cross-shareholdings used by
the founding families to control conglomerates with minority
stakes; take antitrust actions against monopolies; and provide
incentives for startups.

Many of the chaebol are into the third generation of
familial control. Can this kind of dynastic entrenchment be good
for South Korea -- an economy dominated by a bunch of grandkids?

Park has some monumental challenges, and grappling with
North Korea’s nuclear ambitions must be at the top of any to-do
list. Ridding the economy of this dysfunctional family affair is
a close second.

(William Pesek is a Bloomberg View columnist. The opinions
expressed are his own.)